The Office of the Comptroller of the Currency got a mixed reaction following the release of its finalized overhaul to the Community Reinvestment Act, with community groups saying it will weaken the law and bankers concerned about potential regulatory confusion.
After the Federal Deposit Insurance Corp. dropped out of the joint rulemaking process, bankers worry that the OCC's go-it-alone approach could lead to an even more fragmented regulatory environment. The OCC's move means the industry will face different CRA requirements at that agency compared to the two other federal regulators that enforce the law: the Federal Reserve and FDIC.
Congress approved the law in 1977 in an effort to eradicate redlining, the practice of refusing to extend credit in minority neighborhoods, but regulators have not implemented major updates on how they enforce it since 1995. Lawmakers may take issue with the OCC's changes, however, and analysts say Congress may take action to try to block it.
The American Bankers Association, which gave credit to OCC head Joseph Otting for laying out "long overdue" CRA updates, called on the OCC, the FDIC and the Fed to work toward one standard approach.
"We urge regulators to work in concert with all stakeholders to complete CRA modernization and reconcile the different regulatory regimes now in place to avoid any unintended consequences they could have on banks and the communities they serve," ABA President and CEO Rob Nichols said in a statement.
The ABA said it remains concerned about critical elements of the OCC's rule, including performance measurement benchmarks that Nichols said are overly complex and that "will present significant data collection challenges for banks."
The new rule requires banks to report deposit locations at the customer level, whereas most banks currently aggregate deposits at the branch level. Banks also often declare online deposits at a single branch rather than where the deposit came from.
The Independent Community Bankers of America, which represents smaller banks, said the new data collection process could prove onerous.
"While ICBA generally supports modernizing CRA regulations to enhance transparency and reflect banking industry changes driven by technology, community banks remain concerned that the new regulatory framework is too complex and would impose new and excessive data-collection costs that could inhibit their ability to serve local communities," the group said, though it noted it supports the OCC's move to allow banks with less than $2.5 billion in assets to opt out of the new CRA framework.
Community groups, meanwhile, were sharply critical of the OCC rule, saying it could lead to banks lending to fewer low- and moderate-income borrowers. The rule's expansion of CRA-qualifying investments makes it more likely that banks will "cherry-pick" where to put money instead of focusing more resources on those in need, said Jesse Van Tol, the CEO of the National Community Reinvestment Coalition.
Rep. Maxine Waters, the California Democrat who chairs the House Financial Services Committee, blasted Otting for "gutting" the CRA and then announcing he will resign from his post.
"This ill-advised rule badly weakens the implementation of the law and ultimately turns the Community Reinvestment Act into the Community Disinvestment Act," Waters said.
Bankers did praise the OCC for releasing a list of activities that will qualify for CRA credit, which the OCC says will provide standard guidance instead of guidance that varies depending on which examiner is reviewing banks' CRA activities.
The OCC change "lays out a more transparent and objective process for measuring banks' continued service to their communities," the Consumer Bankers Association said in a news release. That includes quantifying banks' CRA exam ratings and giving lenders more incentive to earn a rating of "outstanding," the group said, though it also called on the OCC to give banks "maximum flexibility in implementing these new reforms."
Analysts see murky path ahead for OCC rule
The new rule will be phased in over time, with a data-gathering phase starting Oct. 1 and a full-compliance mandate for most banks on Jan. 1, 2023.
But the future of the OCC rule "is unclear," KBW policy analyst Brian Gardner wrote in a note to clients. Congress is able to block rules through the Congressional Review Act, although that requires approval from both the House and Senate and a signature from the president.
Democrats may have a brief window of time to nix the rule in January if Democrat Joe Biden wins the presidential election and his party sweeps both chambers of Congress, Gardner wrote. The OCC's speedy finalization of the law — the comment period, which resulted in more than 7,500 letters, closed in early April — may also lead to lawsuits, he added.
Waters hinted at potential action from Congress in her statement, saying lawmakers "will not let this final rule stand."
A Biden-appointed OCC leader would also likely redo or undo Otting's changes, according to Ian Katz, an analyst at Capital Alpha Partners.
"Even a Trump-appointed successor could agree to modifications in order to get on the same page as the FDIC and the Fed, the latter of which never agreed to the December proposal," Katz wrote in a note to clients, adding that the OCC's rule is "not the usual kind of Washington polarizing."